Introduction to

Income Taxation
Sonny C. Urfano, CPA, MBA
WHY IS INCOME SUBJECT TO
TAX???

What is income for taxation purpose?

• Gross income means taxable income.

Under NIRC, taxable income refers to gross
income less deduction and personal
exemption allowed by law

• Gross income is any inflow of wealth to the

taxpayer from whatever source, legal or
illegal, that increases net worth.
ELEMENTS OF GROSS INCOME

1. It is a return on capital that increases net

worth
2. It is a realized benefit
3. It is not exempted by law, contract, or treaty

RETURN ON CAPITAL VS RETURN OF

CAPITAL

Return ON Capital increases net worth is

income subject to income tax.

Return OF Capital merely maintains net worth

CAPITAL ITEMS WITH INFINITE VALUE

1. LIFE

Under Sec 32 of NIRC, the proceeds of life insurance policies paid

to the heirs or beneficiary upon death of insured, whether in a
single sum or otherwise, are exempt from income tax.

Proceeds of life insurance contract collected by an employer as a

beneficiary from the life insurance of an officer or any person
directly interested with the trade are likewise exempt

The following are taxable return on capital from insurance policies:

1. Any excess amount received over premium paid by the

insured upon surrender or maturity of the policy.
2. Gain realized by the insured from the assignment or sale of
his insurance policy
3. Interest income from the unpaid balance of the proceeds of
the policy.
4. Any excess of the proceeds received over the acquisition cost
and premium payments by an assignee of a life insurance
policy.
CAPITAL ITEMS WITH INFINITE VALUE

2. HEALTH

Any compensation received in consideration for the loss of health

such as compensation for personal injuries or tortuous acts is
deemed a return of capital

3. HUMAN REPUTATION

Examples of moral damages received from:

1. Oral defamation or slander
2. Alienation of affection
3. Breach of promise to marry
RECOVERY OF LOST CAPITAL VS RECOVERY OF LOST
OF PROFITS

The loss of capital result in decrease in net worth while loss

of profit does not decrease net worth.

The recovery of lost of capital merely maintains net worth

while the recovery of lost of profits increases net worth.

Therefore, the recovery of lost of profits is a return on capital

WHAT IS MEANT BY REALIZED RECEIVED

The term benefits means any form of advantage derived by

the taxpayer.

The following are not benefits hence, not taxable:

1. Receipt of loan
2. Discovery of lost property
3. Receipt of money or property to be held in trust, or to be
remitted to another person
THE REALIZED CONCEPT

The term realized means earned.

Requisites of realized benefits

1. There must be exchange transactions
2. The transaction involves another entity
3. It increases the net worth of the recipient
TYPES OF TRANSFER

1. Bilateral transfer or exchange – onerous transfer

1. Sale
2. Barter

2. Unilateral transfer – gratuitous transfer

1. Succession
2. Donation

3. Complex transactions
-Transaction that are partly gratuitous and partly
onerous. These are commonly referred to as “transfer for
less than full and adequate consideration”
BENEFITS IN THE ABSENCE OF TRANSFERS

1The increase in wealth of the taxpayers in the form of

appreciation or increase in value of his properties or
decrease in the value of his obligation in the absence of a
sale or barter is not taxable

These refers to unrealized gain or holding gains because

they have not yet materialized in n exchange transaction.

a) Increase in value of investments in equity or debts

securities
b) Increase in value of real properties
c) Increase in foreign currencies held or receivable
d) Decrease in value of foreign currency denominated debt
by virtue of favorable fluctuation in exchange rates.
e) Birth of animal offspring, accruals of fruits or growth of
farm vegetables
f) Increase in value of land due to discovery of mineral
reserves
BASIS OF EXEMPTION OF UNREALIZED INCOME

Income received in non-cash consideration is taxable at the

fair value of the property received

Mode of Receipt/Realization Benefits

Taxable items of income maybe realized by the taxpayer in
two ways

1. Actual receipts
Actual receipts involves physical taking of the income in
the form of cash or property
2. Constructive receipts
Constructive receipt involves no actual physical taking of
the income but the taxpayer is effectively benefited
INFLOW OF WEALTH WITHOUT INCREASE IN NET
WORTH

Inflow of wealth to a person that does not increase his net

worth is not income due to the total absence of benefit.

Examples:
a. Receipt of property in trust
b. Borrowing of money under an obligation to return
THE FOLLOWING ITEMS OF INCOME EXEMPTED BY
LAW FROM TAXATION

1. Income qualified employee trust fund

2. Revenue of non-profit, non-stock educational institution
3. SSS, GSIS, Pagibig and Philhealth Benefits
4. Salaries and Wages of minimum wage earner and
qualifies senior citizen
5. Regular income of Barangay Micro-Business Enterprise
(BMBE)
6. Income of foreign governments and foreign government-
owned and controlled corporations
7. Income of international mission and organization with
income tax immunity
TYPES OF INCOME TAXPAYERS
A. INDIVIDUALS
1. CITIZEN
1. Resident Citizen
2. Non-Resident Citizen

2. ALLIEN
1. Resident Alien
2. Non Resident Alien
1. Engage in business
2. Not engage in business

B. CORPORATION
1. Domestic Corporation
2. Foreign Corporation
i. Resident Foreign Corporation
ii. Non-Resident Foreign Corporation
TYPES OF INCOME TAXPAYERS
A. INDIVIDUALS

WHO ARE CITIZEN

i. Those who are citizen of the PH at the time of
adoption of the Constitution on Feb 2, 1987
ii. Those whose father and mother are citizen of the PH
iii. Those born before Jan 17, 1973 of Filipino mothers
who elected Filipino citizenship upon reaching the
age of majority
iv. Those who are naturalized in accordance with the
law
TYPES OF INCOME TAXPAYERS
A. INDIVIDUALS
1. Resident Citizen
Filipino citizen residing in the PH

2. Non-Resident Citizen
1. Citizen of the PH who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with
definite intention to reside therein
2. A citizen of the PH who leaves the PH during the taxable year to
reside abroad, either as an immigrant or for an employment on
a permanent basis
3. A citizen of PH who works and derives income from abroad and
whose employment thereat requires him to be physically
present abroad most of the time during the taxable year.
4. A citizen who has been previously considered as non-resident
citizen and who arrives in the PH at anytime during the taxable
year to reside permanently in the PH shall likewise be treated
as a non-resident citizen for the taxable year in which he arrives
in the PH with respect to his income derived from sources
abroad until the date of his arrival in the PH
TYPES OF INCOME TAXPAYERS
B. ALLIEN
1. Resident Alien – individual residing in the PH who are not
citizen. Alien who are actually in the PH who are not mere
transients or sojourners.
1. An alien who live in the PH without definite intention
as to his stay
2. One who comes to the PH for a definite purpose
which in its nature would require an extended stay
and to that end makes his home temporary in the PH,
although it may be his intention at all time to return to
his domicile abroad

2. Non Resident Alien

i. Engage in business
ii. Not engage in business
TYPES OF INCOME TAXPAYERS
B. ALLIEN
2. Non Resident Alien – individual who are not residing in the
PH and who is not citizen

i. Engage in business (NRA-ETB) – alien who stayed in

the PH for an aggregate period of more than 180
days during the year.

ii. Not engage in business

a) Alien who come to the PH for definite purpose
which in its nature may be promptly
accomplished
b) Alien who shall come to the PH and stay therein
for aggregate period of not more than 180 days
during the year
TYPES OF INCOME TAXPAYERS
THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS

1. Intention
• An alien is normally non-resident alien
• A citizen is normally resident
• An alien who comes to the PH with an immigration visa would be
reclassified as a resident alien upon arrival
• A citizen who would go abroad with 2 year working visa would be
reclassified as non-resident citizen upon his departure.

2. Length of Stay
• Citizen staying abroad for a period of atleast 183 days are
considered non-resident
• Alien who stayed in the PH for more than 1 yr as of end of the
taxable year are considered resident
• Alien who are staying in the PH for not more than 1 year but more
than 180 days are deemed non-resident alien engage in business
• Alien who stayed in the PH for more than 180 days are
considered non-resident alien not engage in trade or business
TYPES OF INCOME TAXPAYERS
TAXABLE ESTATE AND TRUST

1. Estate
• Estate refers to the properties, rights and obligation of a
deceased person not extinguished by his death

2. Trust
• A trust is an arrangement whereby one person (grantor or trustor)
transfers property to another person (beneficiary), which will be
under
TYPES OF INCOME TAXPAYERS
C. CORPORATION

The term corporation shall include one person corporation,

partnership, no matter how created or organized, joint-stock
companies, joint accounts, association, or insurance companies,
except general professional partnership and a joint ventures or
consortium for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal, and other energy
operation pursuant to an operating consortium agreement under
service contract with government.

1. Domestic Corporation
2. Foreign Corporation
i. Resident Foreign Corporation
ii. Non-Resident Foreign Corporation
TYPES OF INCOME TAXPAYERS
C. CORPORATION

1. Domestic Corporation
A domestic corporation is a corporation that is organized
in accordance with Philippine laws. It includes one
person corporation owned and registered by resident
citizen in the Philippines

2. Foreign Corporation
A foreign corporation is one organized a foreign law

i. Resident Foreign Corporation – a foreign corporation

which operates and conduct business in the
Philippines through permanent establishment.

i. Non-Resident Foreign Corporation – a foreign

corporation which does not operate or conduct
business in the Philippines.
TYPES OF INCOME TAXPAYERS
C. CORPORATION

OTHER CORPORATE TAXPAYERS

1. One-person corporation
2. Partnership
1. General Professional Partnership
2. Business Partnership
3. Joint Ventures
1. Exempt joint ventures
2. Taxable joint ventures
4. Co-ownership
THE GENERAL RULES IN INCOME TAXATION

Individual Taxpayers Within Without

Resident citizen
Non-resident citizen
Resident alien
Non-resident alien

Corporate Taxpayer
Domestic corporation
Resident foreign corporation
Non-resident foreign corporation
THE GENERAL RULES IN INCOME TAXATION
INCOME SITUS RULES

Types of Income Place of Taxation

1. Interest Income Debtor’s Residences
2. Royalties Where the intangible is employed
3. Rent Income Location of the property
4. Service Income Place where the service is rendered
5. Gain on sale or personal property
Domestic securities Presumed earned within the PH
Others Where the property is sold
6. Real Property Where the property is located
7. Dividend Income
Domestic Corp Presumed earned within
Foreign Corp *Situs depends of predominance test
8. Merchandising income Earned where property is sold
9. Manufacturing income Where the goods are manufactured
and sold
THE GENERAL RULES IN INCOME TAXATION
Pre-dominance test

If the ratio of the PH gross income of the resident foreign

corporation in the three-year period preceding the year of dividend
declaration, or for such part of the period as the corporation has
been existence, is

• At least 50%, the portion of the dividend corresponding to the

PH gross income ratio that is earned within
• Less than 50%, the entire dividend received is deemed earned
abroad
THANK YOU
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